Financial Principles.—As indicated above, the need for sound financial arrangements was often overlooked when the earliest schemes were started ; in the following section the underlying principles of contributory schemes are briefly examined. In order that a fund may be in a position to meet its obligations it is essential that the capital in hand, together with the real value of contributions payable in the future, is not less than the present value of future benefits. If this equivalence is maintained, the accumulated fund will continue to increase over many years until the expenditure on benefits becomes stabilized. Where, for exam ple, the number of new entrants each year is constant over a long period the position will eventually be reached when the current expenditure will exactly balance the combined income from con tributions and interest. When this occurs the active and retired staff will have reached a stationary condition and very substantial reserves are necessary since in many cases the current expenditure on benefits grows to more than twice as much as the contribution income, and the interest on a fund, which may amount to more than double the current salary bill of the firm, is required to secure equilibrium. The fund should be sufficient without relying on the contributions of future entrants, and its solvency should not be jeopardized if it is decided to close the fund to new entrants. In the past the reasons why large funds should be built up were not always appreciated, and it sometimes happened where a sound fund had been accumulated that an uninformed decision was taken to increase benefits without regard to the enhanced liabilities, often with disastrous results. This experience was not confined to one country in particular. Many instances in which a scheme having been started on unsound lines had to be recon structed later can be found both in the British Empire and in America. In this connection reference can usefully be made to the Report of the New York City Pensions commission (1916) and to the history of superannuation schemes in the British railways. Thus, during the latter part of the 19th century the practice of providing superannuation benefits for railway officials, especially for salaried staff, spread over most of the British railways. Certain important weaknesses were disclosed in 1910 by a departmental committee (Report on Superannuation and Similar Funds of Railway Companies: Parliamentary Paper Cd. 5349) ; in many cases the benefits had been increased without full understanding of the financial implications and in certain instances little provision was made for accruing liabilities, so that the emerging charge under the company's guarantee would ulti mately have become a very grave addition to the normal running expenses. The number of funds has since been materially reduced when the railways were amalgamated in a few large groups after the World War, and the opportunity was taken, where necessary, to readjust the financial arrangements.
Before a scheme is launched the actuary has to estimate the contribution required to provide the benefits, basing his calcula tions on the various elements affecting the problem ; the principal of these are the rate of interest which will be earned on well secured investments, the rates of mortality likely to be expe rienced by the active staff and pensioners respectively, the proportion of staff who will resign voluntarily or who will be retired on health grounds bef ore reaching the normal pension age, and the rate of progression of salaries (on the average) from age to age during service. Such an estimate must necessarily be tentative since experience as to all or many of these elements may change in the future ; it is necessary, therefore, that the financial structure of the scheme should be reviewed periodically by an actuary and, if the valuation discloses a deficiency or a disposable surplus, appropriate action should be taken to restore equilibrium.
Back-Service.—At the initiation of a scheme the determina tion of the terms on which existing officers should be included presents some difficulty. To put such persons into the position which they would have occupied had they become contributors to the scheme when they joined the staff is very costly, but some credit for back-service is generally deemed essential, otherwise the pension available in many cases would be too meagre for sub sistence. In practice the problem has been dealt with in various ways ; for example it is not unusual to provide for all back-service to count at one-half of the standard rate, the whole of the cost of the concession being borne by the employer. Even so the liability cast upon the fund at the outset is substantial and ordinarily its redemption is carried out over a period of years.
Life Office Schemes.—Assurance companies offer many facil ities to employers desirous of setting up superannuation schemes, and often an arrangement for the liabilities to be reinsured with a company is preferred in lieu of instituting a private superannua tion fund. There is a wide choice of contract, and though generally speaking it is not possible to secure quite so much elasticity (e.g., in regard to disability) as under a self-contained scheme the method is popular because it is simple to work and because it protects the employer from the effects of fluctuations of ex perience. Again it is peculiarly adapted to occupations where migration from one employer to another is customary, and for this reason is common in America where, generally speaking, immobility is thought to be a clog on efficiency. Provident schemes and money purchase schemes can successfully be ar ranged with a life office, each contribution (whether fixed or a percentage of current salary) securing a definite endowment or pension, as the case may be, in accordance with a scale prescribed in the policy. Common forms of policy provide in return for periodical contributions, deferred annuities of a fixed sum payable on attainment of a specified age (with or without returns of premiums in the event of earlier death), or endowment assur ances securing a lump sum (with or without bonuses) at a specified age or earlier death, In those cases where the contribution is based on salary the amount of the annuity or the sum assured is fixed in relation. to the salary current when the policy is taken out, supplementary contracts being effected when increases of salary occur. A varia tion of the deferred annuity system provides an annuity of fixed amount for each year's service; the increment of pension being secured by the contribution (increasing year by year) paid in the related year of service. Examples of the life offices schemes are provided by the Federated Superannuation system for universities, under which a percentage of salary is paid by the professor, together with a contribution from the college, as a premium to provide for such superannuation benefits as may be chosen through any one of a number of assurance companies constituting a panel, and by the Federated Superannuation scheme for nurses and hos pital officers; in both of these cases the plan was definitely adopted after a comprehensive review of other alternatives. In America the superannuation of certain classes of teachers is arranged on similar lines, contracts being effected on especially favourable terms owing to subventions from the Carnegie founda tion for the advancement of teaching, instituted in 1905. Another plan, which had its origin in America, is to make provision for pensions by a group assurance covering several provident benefits for the staff of a particular undertaking. These group policies at the outset afforded protection against death only, and were grad ually extended to disability and superannuation.
Appended to this article is a short list of publications from which more detailed information can be obtained. Of these the reports deal with the subject primarily from the point of view of public or quasi-public services, whereas the books are more helpful to an employer contemplating setting up a superannuation scheme for his staff.
BIBLIOGRAPHY.-Report of the Departmental Committee appointed by the Board of Trade on Superannuation and Similar Funds of Rail way Companies (Cmd. 5349, London, H.M. Stationery Office 1910) ; Report on the Pension Funds of the City of New York (New York, Commission on Pensions, 1916) ; Report of the Sub-Committee of the Executive Committee of King Edward's Hospital Fund for London on Pensions for Hospital Officers and Staffs (London, 1919) ; Report of the Departmental Committee on the Superannuation of Persons employed by Local Authorities in England and Wales (Cmd. 329, London H.M. Stationery Office, 1919) ; Report on Superannuation of School Teachers (Cmd. 1962, London, H.M. Stationery Office, 1923) ; Report of the Departmental Committee on the Superannuation of Local Government Employees (Ref. 32-267, London, H.M. Stationery Office, 1928) ; Luther Conant, Junr., Critical Analysis of Industrial Pension Systems (New York, 1922) ; H. Dougharty, Pension, Endowment and Life Assurance Schemes (London, 1927) ; H. H. Edwards and R. Murrell, Staff Pension Schemes in Theory and Practice (London, 1927) ; B. Robertson and H. Samuels, Pension and Superannuation Funds (Lon don, 1928). (G. S. W. E.)